The Financial Sector Conduct Authority (FSCA) has slapped a R50-million administrative penalty on Viceroy Research and three partners – Aiden Lau, Fraser John Perring and Gabriel Bernarde – for publishing “false, misleading or deceptive” statements about Capitec Bank in 2018 that caused its share price to drop by 23%.
The FSCA says Viceroy Research and its partners had contravened Section 81 of the Financial Markets Act, which makes it an offence to publish false or misleading statements about securities and which the author “ought reasonably to know” is false, misleading or deceptive. The act also makes it an offence to omit material facts about securities that could lead to making false or misleading conclusions about securities.
Once made aware of false or misleading statements in the course of research, the author must, without delay, publish a correction.
FSCA Commissioner Unathi Kamlana told journalists on Wednesday that Viceroy Research was alerted to the fact that its research on Capitec Bank was based on false or misleading assumptions, yet it failed to issue a correction when this was brought to its attention.
“They sought to benefit from this by an arrangement with a client who had taken a short position in Capitec shares. They did this while destroying value in Capitec shares for others or dissuading others from purchasing these shares,” he said.
The graph below shows the drop in the bank’s share price in early 2018.
The FSCA did not name the partner who had taken a short position in Capitec shares.
The regulator says some of the factors determining the size of the fine were the need to deter this type of conduct in the future, the seriousness of the contravention, the losses suffered by Capitec shareholders (while Viceroy and its partner benefitted financially), and the impact the report had on SA’s financial system.
“This penalty is particularly significant because it shows just how far the Financial Markets Act (FMA) reaches,” says Kamlana. “Although the Viceroy Research Partnership, and its partners, are not financial institutions, and are domiciled in a different jurisdiction, their comments about South African-listed securities make them subject to the stipulations of the act. The penalty also makes it clear that breaching our financial sector laws has serious consequences”.
In a series of reports published in 2018, Viceroy alleged that Capitec’s balance sheet, income and solvency numbers were not reliable, and that it was underrepresenting losses “to pretend that uncollectable loans are collectable and still accruing income.” It alleged that at least R10 billion of loans fell into this uncollectable category. This was disputed by Capitec, with the SA Reserve Bank coming to its defence.
Listen/Read: Viceroy founder Fraser Perring explains why his company took aim at Capitec
Read: The Viceroy lesson
Read/Listen: Viceroy’s identity has been unmasked but its business model is a murky picture
In response to the penalty, Viceroy tweeted:
Viceroy are challenging FSCA's minimum effort investigation & fine imposed on us. We have cooperated with the @FSCA_ZA with their enquiries & have maintained open dialogue. Contrary to their assertion, we believe this fine seeks to shut down critical analysis of SA companies. https://t.co/Lqjf6D4Jmn
— Viceroy (@viceroyresearch) September 8, 2021
The FSCA said it also investigated possible insider trading in Capitec securities during the period of the Viceroy publications but cleared it of any wrongdoing in this regard.
When questioned as to whether this penalty could discourage short selling of securities, the FSCA’s head of enforcement, Brandon Topham, said the objective was not to discourage short selling, but to prevent the publication of false information, and to protect market participants and investors. Kamlana said a more effective way of dealing with situations like this was through discourse rather than administrative action. However, Viceroy had been given adequate opportunity to correct its erroneous research and had not done so.
Topham hit back at Viceroy’s claim of a “minimum investigation” investigation by the FSCA, saying it took more than two years – including extensive dealings with the Securities and Exchange Commission (SEC) of the US to compel a representative of the Viceroy Research partnership to be questioned under oath – to bring the investigation to its conclusion.
Some of the specific findings of false and misleading statements include:
- Viceroy’s claim that Capitec had to write off more than 42% of the gross collectible principal debt due to it in the 2017 financial year, which the FSCA found not to be true;
- The FSCA also rejected Viceroy’s claim that Capitec had a “pervasive practice” of rescheduling delinquent loans by issuing new loans to clients;
- That FSCA says Viceroy made errors in calculation to arrive at the conclusion that Capitec’s loan book was irreconcilable to the tune of R3 billion;’
- The regulator also rejected the Viceroy claim that Capitec was guilt of reckless lending and would lose a court case, triggering a class action lawsuit (the basis of this claim being the erroneous assumption that a lawsuit was imminent and would centre around a multi-loan product that was prohibited – which was not the case);
- That the imagined lawsuit would result in Capitec having to pay back R12.7 billion to current and former clients;
- The incorrect claim that the Capitec board was made up largely of several executives from both PSG and Steinhoff;
- That Capitec would require impairments and write-offs of more than R11 billion due to its “impossibly low arrears.”
When asked whether the FSCA would act against analysts who punted shares that later tanked, Kamlana said the regulator is bound to act in terms of the FMA, particularly where false, misleading and deceptive information is published.
Viceroy’s response to the FSCA’s findings:
To be abundantly clear: the FSCA’s findings and list of grievances are entirely predicated on Viceroy not publishing “full and frank corrections” to our analysis after Capitec’s open response to our report. The grievances were not based on an investigation into Viceroy’s claims, but into Viceroy itself, from the onset.
Viceroy Research was not notified of the Tribunal date or time, merely its findings. We have informed the FCSA that we are appealing this.
Listen: Ciaran Ryan discusses Viceroy’s FSCA fine with Dudu Ramela